The second quarter of 2017 brought only two accounting standards and might represent the calm before the next storm. The Financial Accounting Standards Board (FASB) currently has 24 projects in various stages of development on its agenda and 10 research projects.

Major projects, including accounting updates to hedging, consolidation and the disclosure framework are still in the works, and research projects indicate that the FASB may be taking a closer look at accounting for intangibles, distinguishing liabilities from equity, inventory and cost of sales, subsequent accounting for goodwill and financial performance.

Accounting for Modifications to Stock Compensation

One of the accounting standards issued this quarter address when the modification accounting for a stock based compensation arrangement applies. As explained in our MHM Messenger, the new standard clarifies what types of changes will trigger the requirements of modification accounting and is expected provide a more uniform application of the guidance to all companies. The change to the guidance is effective for calendar years, including interim periods, ending Dec. 31, 2018.

Service Concession Arrangements

Service concession arrangements are a unique area of accounting for which little accounting guidance exists in the United States. FASB Accounting Standards Update 2017-10, Service Concession Arrangements (Topic 853), Determining the Customer of the Operation Services (ASU 2017-10), resolves an issue identified by the FASB Emerging Issue Task Force (EITF) in the fall of 2016. It clarifies how to determine the customer in a service concession arrangements involving public sector infrastructure in light of ASC Topic 606 Revenues from Contracts with Customers (Topic 606).

Concession arrangements involve situations where a private entity ("the operating entity") manages a public entity ("the grantor")'s infrastructure for a set time. Infrastructure could include airports, roads, bridges, tunnels, prisons and hospitals. During the time the operating entity is managing the grantor's infrastructure, major maintenance may be required in order to prolong the useful life of the infrastructure. Accounting for the maintenance and the revenue from the service concession arrangement produces some accounting complexities, particularly with the new revenue recognition guidance.

ASU 2017-10 clarifies that in these arrangements, the grantor governmental entity is the customer of the private entity in the arrangement. For example, if a governmental entity enters into a public-private partnership to operate a toll road the private company must decide whether its customer is the governmental entity that is granting the use of the toll road or the individual drivers that utilize the toll road. Existing practice allows for diversity in determining who the customer is resulting in different revenue recognition patterns. Under the revised guidance all entities will consider the governmental entity, and not the individual driver, as the customer.

Entities that have not yet adopted revenue recognition changes may adopt ASU 2017-10 early without also adopting revenue recognition. If early adopting the standard, entities may use a modified retrospective approach and use a cumulative effective adjustment to equity beginning in the fiscal year of adoption. Or, an entity may use a retrospective approach, which would apply the new guidance to all years presented in the financial statements in the year of adoption. Disclosures for early adoption would depend on the transition method.

Alternatively, entities should adopt the update at the same time as the adoption of ASC Topic 606, in which case the transition method should align with the method of adoption used for ASC Topic 606.

Transitioning to New Standards

Although the FASB hasn't released major new standards this quarter, entities should be preparing for the implementation of the numerous significant accounting standards updates issued over the past few years. Revenue recognition, leasing and financial instruments, including credit loss changes, will be taking effect in close succession to one another.

To efficiently and effectively implement all of the new guidance, it is essential that entities develop a timeline, consider their staffing levels, including project resources and training, and perform a risk assessment. They should also scope the implementation process, and determine their fraud risk. An evaluation of internal controls is important as well. Entities may need software upgrades to address the new procedures and processes that will be required to keep in compliance with the new standards.

An assessment of the disclosure effectiveness and completeness will also be important. Working with key stakeholders, including financial statement users and auditors can help ensure that your implementation process is thorough.

Consolidation: Proposed Accounting Improvements

A recently released exposure draft seeks to improve implementation for ASU 2015-02, Consolidation (Topic 810) Amendments to Consolidation Analysis.

A change to the private company accounting alternative would provide private business companies an accounting election to forgo the Variable Interest Entity (VIE) guidance for legal entities under common control if both the parent company and the legal entity were private companies. Once made, the accounting election would apply to all similar current and future arrangements. The change would expand the alternative for common control leasing arrangements in ASU 2014-07, Consolidations (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. It would also simplify the cost and complexity of implementing the VIE guidance for private companies. A private company would still be required to follow other consolidation guidance, including the voting interest entity guidance.

Another proposed update affects decision-maker and service provider fees ("fees"). When a reporting entity has a fee with a legal entity that has been invested in by other entities that are under common control with the reporting entity, the interests held by the sister entities of the reporting entity would be evaluated on a proportional basis in determining if the reporting entity holds a variable interest. The change would align the analysis of assessing whether a fee is a variable interest with the assessment of the fee when determining whether the reporting entity is the primary beneficiary of a VIE. It could result in fewer fees being classified as variable interests, which would reduce the instances where an entity receiving a fee will be found to be a primary beneficiary of a VIE under the related party tie breaker test and reduce the instances where disclosure of a relationship with a VIE is required.

The VIE related party tie breaker test would also be updated to eliminate the mandatory consolidation in situations where power is shared among related parties and no one member has a controlling financial interest over a VIE. A reporting entity who shares power over a VIE with a related party or whose common control related party group has the characteristics of a primary beneficiary, but for which no individual entities has those characteristics, would determine whether it is the primary beneficiary by considering:

  • The purpose and design of the VIE
  • The relationship and significance of the activities of the VIE to the related parties
  • The nature of the reporting entity's exposure to the VIE (for example, through pro rata equity, senior interest, subordinated interest, and so forth)
  • The magnitude of the reporting entity's exposure to the variability associated with the anticipated economic performance of the VIE (for example, whether the reporting entity's exposure is greater than a majority of the variability associated with the anticipated economic performance of the VIE).

When the related parties under common control determine that as a group, they have a controlling financial interest, then the parent entity would consolidate the VIE. The change is intended to clarify practice and reduce instances when a reporting entity recognizes assets that it does not control and records liabilities for which it has no obligation.

Comments on the changes are due to the FASB by Sept. 5, 2017. Adoption would be required at the same time as the consolidation guidance if the entity has not yet adopted the consolidation guidance.

PCAOB Update

During the second quarter the Public Company Accounting Oversight Board (PCAOB) issued updates to the auditor's report for audits of public companies. The update language incorporates improvements designed to provide investors additional information to investors about the work the auditor performed including the duration of service of the auditor and critical audit matters (CAMS). Updated wording for the auditor report is applicable for audits for periods ending Dec. 31, 2017, with the requirement to report required in subsequent periods. For additional information read our MHM Messenger.

In addition to the update to the auditor's report the PCAOB also issued proposals to improve the requirements for the auditing of estimates, including fair value, and the use of specialists, which are designed to address audit deficiencies and diversity in practices that have been identified during the inspection process.

For More Information

MHM will monitor accounting standards changes and other trends to help you stay informed of the shifting accounting landscape. For specific comments, questions or concerns, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at or 816.945.5614.

Published on June 27, 2017